Fueled by a $370 billion jump in the value of household real estate, household net worth grew $1.7 trillion in the third quarter to $64.8 trillion, the Federal Reserve reported Thursday in its quarterly Flow of Funds report.

And, while the value of owner-occupied household real estate increased, total residential mortgage debt fell $85.8 billion. As a result, owners’ equity increased almost $390 billion. Homeowners’ equity as a percentage of the value of the real estate rose to 44.8 percent, the highest level since 2007, according to the report.

The report is the most comprehensive look at aggregate household and corporate balance sheets and income statements, a sort of blood pressure reading on the economy and its components.

The second quarter drop in mortgage debt marked the 14th straight quarterly drop. According to the report, aggregate mortgage debt at the end of the second quarter was $9.489 trillion, the lowest level in more than six years when homeowners owed $9.49 trillion and their equity represented 57.9 percent of the value of their homes.

The improvement in household net worth more than reversed a $157.2 billion drop in the second quarter. An increase in net worth means assets grew faster than debts.

The increase in net worth is good news for a struggling economy according to the economic theory of “wealth effect” which holds that consumers tend to spend more if they “feel” wealthier, even if income drops and conversely.

Total household debt fell $10.9 billion in the third quarter, essentially flat in percentage terms, a decline of just 0.08 percent. Most of the change in net worth came from asset growth, attributable to the stock market. The value of stock holdings rose $524.4 billion in the third quarter, reversing a $386 billion drop in the second quarter.

The “wealth effect” theory differentiates between the growth in the value of real estate and stock market assets with the change in real estate values having a larger impact on spending.

According to the report, disposable household income increased 0.5 percent or $61.1 billion in the third quarter to $11.9 trillion compared with a 0.7 percent increase or $85.4 billion in the second quarter. Quarterly income growth since the onset of the Great Recession in December 2007 has averaged 0.7 percent including four quarter-quarter declines from the third quarter of 2008 through the third quarter of 2009. (Disposable personal income rose 0.3 percent in the second quarter of 2009).

The slippage in personal income growth signals another challenge to an economy heavily dependent on personal consumption spending which is more than 70 percent of the nation’s Gross Domestic Product.